Thompson v. Commissioner

United States Court of Appeals
For the Eighth Circuit
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No. 12-1725
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Randall J. Thompson; Karen G. Thompson
lllllllllllllllllllllAppellants
v.
Commissioner of Internal Revenue
lllllllllllllllllllllAppellee
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Appeal from the United States Tax Court
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Submitted: January 15, 2013
Filed: September 9, 2013
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Before RILEY, Chief Judge, WOLLMAN and GRUENDER, Circuit Judges.
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WOLLMAN, Circuit Judge.
Randall and Karen Thompson (the Thompsons) appeal from the United States
Tax Court’s order dismissing their petition challenging a notice of deficiency issued
by the Internal Revenue Service (IRS). We conclude that the Tax Court had
jurisdiction over the Thompsons’ petition, and thus we reverse.
In 2001, Randall Thompson (Thompson) formed RJT Investments X, LLC
(RJT) and began acting as RJT’s tax matters partner. Later that year, Thompson,
using RJT, entered into an illegal “Son-of-BOSS” tax shelter transaction in order to
offset capital gains of approximately $21.5 million. See RJT Invs. X v. Comm’r, 491
F.3d 732, 734 (8th Cir. 2007) (discussing the details of this transaction). Thereafter,
the IRS issued RJT a notice of Final Partnership Administrative Adjustments (FPAA)
for 2001, a process which “allows the IRS to make the specified adjustments to
partnership filings and impose penalties for misrepresentations that result in the
underpayment of taxes by individual partners should relevant parties not challenge the
adjustments.” Id. at 734-35 (footnote omitted). The IRS sought to declare RJT a
sham, zero out RJT’s return, and impose penalties for acts resulting in tax
underpayment. Id. at 735. RJT and Thompson challenged the FPAA in the Tax
Court. “The Tax Court determined, as a partnership item, that [RJT] was a ‘sham,
lacked economic substance and was formed and/or availed of to artificially overstate
the basis of the interest of Randall Thompson . . . in the amount of $22,006,759 for
purposes of tax avoidance . . . .’” Id. The Tax Court “then imposed penalties for the
resulting underreporting of taxes.” Id. Thompson later challenged the Tax Court’s
ruling, and we affirmed. See id. at 735-38.
Generally, upon the conclusion of proceedings challenging an FPAA or the
expiration of time for initiating such proceedings, “the IRS may proceed to make
computational adjustments to each partner’s return.” Desmet v. Comm’r, 581 F.3d
297, 302 (6th Cir. 2009). There are two procedures through which the IRS makes
such assessments. “First, the IRS may directly assess the tax against the individual
partner by making a computational adjustment—applying the new tax treatment of all
partnership items to that partner’s return.” Id. (citing § 6230(a)(1)).1 “If the partner
disagrees with the application of the FPAA to his own return, he must pay the tax and
then challenge the computational adjustment in a refund suit against the government.”
Id. (citing § 6230(c)). “Second, if the partner’s liability relates to ‘affected items
1
All statutory section references are to the Internal Revenue Code, Title 26 of
the United States Code.
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which require partner level determinations,’ . . . § 6230(a)(2)(A)(i), then the IRS must
send a notice of deficiency to that partner, thereby initiating proceedings against him
individually, pursuant to the standard deficiency procedures set forth in . . . §§ 6211-
16.” Id. “Deficiency proceedings allow the partner to dispute liability by filing a
petition for redetermination before paying the tax.” Id. (citing § 6213(a)).
In this case, on September 22, 2008, the IRS issued a notice of deficiency to the
Thompsons for 2001, explaining that it had made four adjustments to their return in
accordance with the RJT partnership level proceedings: (1) eliminated dividend
income from RJT in the amount of $206; (2) eliminated a flow-through short-term
capital loss from RJT in the amount of $12,415; (3) eliminated a flow-through
investment expense deduction from RJT in the amount of $81,040; and (4) eliminated
the short-term capital loss from the liquidation of Thompson’s interest in RJT. The
IRS also imposed a 40% penalty on the Thompsons’ underpayment of taxes resulting
from these adjustments. In total, the IRS determinated that the Thompsons owed a tax
deficiency of $4,634,243 and a penalty of $1,853,697.20, plus interest. The next day,
the IRS directly assessed these amounts against the Thompsons.
Thereafter, the Thompsons filed a petition in the Tax Court challenging the
notice of deficiency. The IRS moved to dismiss for lack of jurisdiction, arguing that
it had issued the notice of deficiency in error; that under § 6230(a)(1), the deficiency
procedures of the Internal Revenue Code were inapplicable; and that, as a result, the
Thompsons were not permitted to challenge the IRS’s determination in the Tax Court.
The majority of the Tax Court agreed with the IRS and dismissed the petition.2
2
The Tax Court noted two discrepancies involving the IRS’s calculations
regarding the amount of the short-term capital loss reported by the Thompsons and
also $206 in dividends. As to the former, the parties stipulated to corrected amounts,
namely, a tax deficiency of $4,248,420 and a penalty of $1,699,368.
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The Thompsons appeal, arguing that the Tax Court erred in determining that it
lacked jurisdiction over their petition.3 The Thompsons argue that the Tax Court did
not decide in its 2006 order Thompson’s outside basis in RJT, and that Thompson’s
outside basis must be determined at the partner level. We review de novo the Tax
Court’s determination regarding its jurisdiction. Bartman v. Comm’r, 446 F.3d 785,
787 (8th Cir. 2006). As stated above, for the Tax Court to have jurisdiction over the
Thompsons’ petition, there must be a “deficiency attributable to affected items which
require partner level determinations[.]” § 6230(a)(2)(A)(i).
We agree with the Thompsons that the Tax Court’s 2006 order did not
determine Thompson’s outside basis in RJT. To be sure, the language of the Tax
Court’s 2006 order suggests at first glance such a determination was made—“that
[RJT] was . . . formed and/or availed of to artificially overstate the basis of the interest
of Randall Thompson . . . in the amount of $22,006,759 for purposes of tax
avoidance[.]’” RJT Invs., 491 F.3d at 735. A careful reading of the order, however,
reveals that the Tax Court concluded, as relevant here, (1) that RJT was formed and/or
availed of to artificially overstate Thompson’s basis in RJT; and (2) that Thompson’s
purported basis in RJT—$22,006,759—was overstated. It does not necessarily
follow, however, that Thompson’s entire purported basis was overstated, or in other
words, that Thompson’s outside basis in RJT was zero.
Because the Tax Court did not determine Thompson’s outside basis in RJT, the
IRS properly issued a notice of deficiency under § 6230(a)(2)(A)(i). We agree with
the other circuits to have addressed the issue that outside basis is an affected item that
must be determined at the partner level. See Jade Trading, LLC ex rel. Ervin v.
United States, 598 F.3d 1372, 1380 (Fed. Cir. 2010) (“Because outside basis is not a
3
As to the Tax Court’s jurisdiction over the penalties, the Thompsons concede
“that they cannot here collaterally attack the jurisdiction of the Tax Court” because
“[t]he earlier Tax Court Decision in RJT is res judicata on the applicability of
penalties here.” Appellants’ Reply Br. 11. Accordingly, this issue is moot.
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‘partnership item,’ we conclude that the Court of Federal Claims lacked jurisdiction
to determine that the Ervins had no outside basis in Jade.”); Petaluma FX Partners,
LLC v. Comm’r, 591 F.3d 649, 655 (D.C. Cir. 2010) (“We hold that the Tax Court
had no jurisdiction to determine that Petaluma’s partners had no outside basis in the
disregarded partnership.”). Accordingly, the Tax Court had jurisdiction over the
Thompsons’ petition challenging the notice of deficiency. See §§ 6213(a),
6230(a)(2)(A)(i).
The order dismissing the petition is reversed, and the case is remanded for
further proceedings.
RILEY, Chief Judge, concurring.
I find myself in fundamental agreement with both of my colleagues in this
complex case. As emphasized by Judge Wollman (and comprehensively explained
in Judge Holmes’ dissenting Tax Court opinion), the partnership-level determination
that Randall Thompson’s outside basis was overstated still requires partner-level
computation and legal analysis to determine Thompson’s correct tax liability. And
the ambiguous partnership-level determination leaves it unclear whether
(1) Thompson’s basis was overstated by $22,006,759 or (2) his purported basis of
$22,006,759 was overstated by an amount to be determined, as it should, at the partner
level. Therefore, I fully concur in Judge Wollman’s opinion for the court. Yet I also
agree with Judge Gruender’s alternate basis for reversing the Tax Court’s decision,
as explained in the fourth paragraph of his concurrence.
GRUENDER, Circuit Judge, concurring in judgment.
I write separately because I conclude that the tax court made a determination
in the partnership-level proceeding that Randall Thompson’s outside basis in RJT was
zero. However, since outside basis is an affected item that should be determined at
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the partner level, I agree that the tax court has jurisdiction over appellants’ petition
challenging the notice of deficiency.
The court concludes that the tax court did not determine Thompson’s outside
basis in the partnership-level proceeding. The tax court did not so find, the court
argues, because the tax court determined only that Thompson’s basis was overstated.
From this, the court reasons that “[i]t does not necessarily follow . . . that Thompson’s
entire purported basis was overstated.” Ante at 4. This line of reasoning does not lead
to the court’s conclusion. If “[i]t does not necessarily follow . . . that Thompson’s
entire purported basis was overstated,” id., then it likewise does not necessarily follow
that Thompson’s basis was only partially overstated. As a result, the court’s reasoning
suggests only that the tax court’s language may be ambiguous, a proposition that I
reject for the reasons discussed below. Based on this reasoning alone, the court
cannot definitively conclude that the tax court did not determine Thompson’s outside
basis.
I would find that the tax court clearly determined Thompson’s outside basis to
be zero. Starting with the text of the opinion, the tax court found that RJT “was a
sham, lacked economic substance, and was formed and/or availed to overstate
artificially the basis of the interest of Randall Thompson in RJT Investments X, LLC
in the amount of $22,006,759.” RJT Investments X v. Comm’r, No. 011769-05, 2006
WL 2504035, at *1 (Apr. 18, 2006). The tax court further found that RJT “is
disregarded for Federal income tax purposes.” Id. As the court notes, Thompson’s
purported basis in RJT, as reflected on his tax return, is $22,006,759. Ante at 4. Thus,
if Thompson’s purported basis is $22,006,759, and if that basis was “overstate[d]
artificially . . . in the amount of $22,006,759,” then the tax court necessarily concluded
that Thompson’s outside basis in RJT was zero. That is, subtracting the amount by
which the tax court determined Thompson’s basis to be overstated ($22,006,759) from
Thompson’s purported outside basis ($22,006,759) inescapably leads to the
conclusion that the tax court determined Thompson’s outside basis was zero.
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Even though I conclude that the tax court’s partnership-level decision did
determine Thompson’s basis, I agree that the tax court has jurisdiction over
appellants’ petition. Our prior panel opinion in this matter, which affirmed the tax
court’s partnership-level decision, did not reach the question of whether the tax court
had jurisdiction to determine Thompson’s outside basis at the partnership level. See
Passmore v. Astrue, 533 F.3d 658, 660 (8th Cir. 2008) (“[W]hen an issue is not
squarely addressed in prior case law, we are not bound by precedent through stare
decisis.”). And I agree with the court and with the D.C. Circuit’s decision in
Petaluma, 591 F.3d at 655, that outside basis is an affected item that should be
determined at the partner level. Thus, I agree that the order dismissing appellants’
petition should be reversed and that the case should be remanded for further
proceedings.4
For the foregoing reasons, I concur in the judgment.
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4
The preclusive effect in the tax court of its prior adjudication of Thompson’s
outside basis in a partnership-level proceeding is a question I need not reach here.
The Commissioner does briefly reference issue preclusion with respect to the
adjudication of Thompson’s outside basis, Appellees’ brief at 43 n.6, but the
Commissioner does not discuss or apply its elements. See Berger Transfer & Storage
v. Central States, S.E. & S.W. Areas Pension Fund, 85 F.3d 1374, 1377 (8th Cir.
1996) (declining to apply issue preclusion in part because moving party “made no
effort” to establish an element thereof); see also Vandenboom v. Barnhart, 421 F.3d
745, 750 (8th Cir. 2005) (refusing to consider argument on which moving party
“provide[d] no analysis of the relevant law or facts”).
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